Could stock market action this winter predict who could win the White House In November?

Could stock market action this winter predict who could win the White House In November?

19:00, 10 January 2016

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By Colin Cieszynski, CFA, CMT, CFTe, Chief Market Strategist, CMC Markets
After jockeying for position through the second half of 2015, the rubber hits the road this quarter for US Presidential Candidates as US Primary season starts to sort out the contenders from the pretenders.
Public opinion toward the parties and their candidates can be measured in many ways. While the actual vote results are what count for getting elected, how the stock market reacts to voting results can provide a broader gauge of opinion that reaches beyond party members.
The table below shows how stock markets have performed on a monthly basis over the last 14 presidential election years (since 1960), which tells us a few things both about how the election campaign may influence the stock market, but also how the stock market could predict how the campaign could go.
The table compares what happened in years where the party changed power versus years where whichever party held the White house was re-elected. It also compares how markets performed in years when there was an incumbent running again versus years where there was a wide open race.
(Note: to quality as an incumbent the same person had to be running again so Johnson in 1964 and Ford in 1976 are considered non-incumbents in this study because they were appointed mid-term.)
Source: CMC Markets
There are a number of interesting observations we can draw from this chart.
First, in years when the party in power changed hands in November, January and February saw negative returns on average. On the other hand, in years where January and February were positive, the party in power was re-elected. This suggests that stock market action early in the year may be an early indicator of the level of content or discontent with the economic and political direction of the country.
Second, looking specifically at years where there was no incumbent running for President as will be the case in 2016, the stock market (Dow Jones Industrial Average) has gone down in January and February on average but has gone up in years when there was an incumbent running. This suggests some initial uncertainty about who could win and what policy changes they could make can drag on stock markets through the early stages of the campaign.
Finally, taking a deeper look at non-incumbent elections, years where the party in power held on to the White House with a different candidate, January and February posted strong 2-4% gains while years that ended with a governing party’s new candidate fail to hold on to the White House, stocks fell about 2% in January and February.
What does all of this mean for 2016?
US stocks have had a pretty good run under President Obama over the last seven years helped by a very accommodative Federal Reserve Board. The Fed is expected to be on a course of normalizing interest rates through 2016, a sign that the economy is finally back up on its feet and growing.
Based on this, it would seem heading into 2016 that the level of discontent in the economy and desire for political change would be relatively low, so all else being equal, stocks should perform relatively well in January and February on expectations of a positive environment for corporate earnings. Rising stocks could also indicate that Hillary Clinton (who at the time of writing has a commanding lead in the Democratic nomination race) could go all the way this time and bring her family back to the White House and continue the same general economic policy direction of President Obama.
If stocks were to unexpectedly turn south this winter, however, it would suggest a more dismal or uncertain outlook for the year that could manifest itself in a desire for political change come the autumn. This could improve the election prospects for one of the several Republican candidates in their runs for the Oval Office.
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